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How Much Life Insurance Do I Need?

No one likes to think about what will happen when they pass, but ensuring that your loved ones are taken care of and your obligations are met is an important part of financial planning. After all, our loved ones will likely be responsible for covering final expenses.

Life insurance plays an important part in taking care of those expenses and making sure your loved ones are set up for a stress-free future. But when approaching the subject, many people ask, “How much life insurance do I need?” To help answer that question, we’ve put together a comprehensive guide that will help you determine how much life insurance makes sense for your unique circumstances.

Here’s what you need to know about life insurance.

What is Life Insurance?

Life insurance is a policy that covers your final expenses and debt obligations such as mortgage payments, car payments, and credit card bills upon your passing. You can also include enough in the premium to cover the day-to-day expenses of those who depend on your income.

There are important aspects to each life insurance policy. They are:

  • The insurance policy insurer: The insurance company that issues the policy is called the insurer. They are regulated by the state they operate in.
  • The policyholder: The person who holds the policy can be the person insured, or the holder can insure another person.
  • The insured: This is the person whose life is insured by the policy.
  • Death benefit: When the insured passes away, this is the amount the insurance company pays.
  • Beneficiaries: The people who receive the death benefit when the insured passes away. It can be a single beneficiary or multiple beneficiaries.
  • Policy length: This is the time length of an insurance policy that the insurer agrees to. It will pay the death benefit anytime during this period.
  • Premium: This is the payments that the policyholder makes to the insurer, which can be monthly, semiannually, or yearly.
  • Cash value: Whole life policies have a cash value that increases over time. The policyholder can cash out or borrow against the policy.

People Rely On You

If you have dependents who rely on your income for day-to-day expenses, such as a spouse, children, or elderly parents, purchasing an insurance policy is a smart move. An insurance policy payout will allow them to continue in the lifestyle that they enjoyed before your passing.

You Want To Cover Your Burial Expenses

Burial costs are expensive, and if you want to ease the burden on your loved ones, dedicated insurance can do it. This type of whole life policy, called final expense insurance, will ensure that those you leave behind will not be saddled with the high cost of a funeral and burial.

You Have a Lot of Debt

Did you know that when you pass away, your debt still has to be paid? Unless you have a life insurance policy that exceeds the amount of debt, your estate could be eaten up by that debt. That would leave your beneficiaries with nothing and your debtors with everything.

Who Needs Life Insurance?

Not everyone needs to purchase a life insurance policy, but the truth is that most adults do. Some of the reasons people buy life insurance are:

  • To replace their income for the people who rely on them
  • To pay for final expenses such as burials
  • To cover the debt they leave behind
  • To cover real estate or inheritance taxes
  • To leave a cash inheritance for their loved ones

If you’re wondering whether or not you should buy life insurance, determine whether any of the following apply to you. If they do, a life insurance policy is probably right for you.

How Much Life Insurance Coverage Do You Need?

Before answering this question, you should first ask yourself, “what life insurance do I need?” That’s because there are two main types of life insurance, and each has different characteristics.

Term Life Insurance

This type of insurance is only good for a set term. With this type of policy, you will be insured for that set amount of time as long as you pay your premiums. Once the policy term expires, your insurance coverage expires with it. You will have to reapply for insurance, and because you are older – and your health may have deteriorated – your premium is likely to be higher.

Whole Life Insurance

With this type of insurance, you will never have to worry about your policy expiring, as long as you pay your premiums. Your premium is calculated at the age you are when taking out the policy and it never changes. Final expense insurance is a good example of this type of policy.

Term Life InsuranceWhole Life Insurance
Only good for a period of timeGood until you pass as long as premiums are paid
Must reapply after the policy term expiresThe policy does not expire, so you never have to reapply
Does not accumulate cash valueAccumulates cash value
Less expensive premiums when you’re young but go up as you ageMore expensive premiums, but they never increase

Now that you understand your insurance policy choices, let’s talk about how much coverage you need.

The amount of insurance you need depends on why you need it. For instance, if you are purchasing insurance to cover your burial expenses, you should speak to a funeral director to get a cost estimate and then buy enough to cover that – plus the cost of inflation.

On the other hand, if you need insurance to take care of outstanding debts, you should total the amount of your debt and be certain that your policy can cover it. A final expense insurance policy can cover both the cost of burial and your debts.

Finally, some people use life insurance policies to ensure that their loved ones are taken care of after they pass. In this instance, a good rule of thumb is to use their yearly salary and multiply it by ten years. So, someone who earned $50,000 a year would purchase a $500,000 insurance policy. However, this is only a starting point, because that money will not cover non-salary income, such as health insurance or contributions to a retirement account.

Ideally, you will use more complex calculations when deciding how much life insurance to buy.

How to Manually Calculate Life Insurance Needs

Have you ever wondered how to calculate life insurance? Before signing up for a new policy, you should understand how much life insurance will meet your – and your beneficiaries’ – needs. Here are a few ways to calculate the life insurance that will suit your needs

Salary Plus Future College Costs

This calculation is the same as the one mentioned above – 10 times your salary – but it also adds in $100,000 for every child who will attend college. So, if you earn $50,000 a year and have two children, you would take out an insurance policy for $700,000.

The DIME Calculation

If you want a more detailed estimate of how much insurance you should purchase, the DIME method is a great one to use:

D: Your debt and final expenses total. Add up all of your debt, including your mortgage and car payments, and add that to an estimate of your burial or cremation expenses.

 

I: Consider how many years of income you want to leave your family with. For instance, if you leave behind a spouse with a young child, how many years of support do you want to provide?

 

M: Find out the balance remaining on your mortgage and add that figure to the total.

 

E: Your kid’s education is the final number you will add to this total. Estimate the total cost of education for each one of your kids.

While this formula is more comprehensive than the others, it still doesn’t account for any life insurance policies you already have or contributions from a stay-at-home parent.

As you can see, it all depends on your unique needs, those of your beneficiaries, and what your goals are.

For a more complete estimate of how much life insurance you should buy, consider using a life insurance calculator.

What is the Minimum Life Insurance You Need?

When looking for recommended life insurance coverage guidelines, many people ask, “what is the minimum life insurance policy?” The answer is… It depends.

If your goal is to support your family for years to come, you should seek to replace your income for as many years as possible. But if your goal is to pay for your final expenses and make sure your debts are covered, you’re in good company. In fact, 84% of those asked in a 2020 survey conducted by LIMRA and Life Happens said paying for burial expenses was their number one  .

Curious about how much you will spend when purchasing burial insurance? Here are the general guidelines.

Monthly Premium Rates for Men*

$5,000 Death Benefit
AgeDetermined 'In Good Health' by InsurerNo Health Questions Asked
50$16$20
55$19$24
60$23$29
65$29$35
70$38$44
75$51$63
80$65$82

* Estimated rates do not reflect the rates of any particular life insurance company.

$10,000 Death Benefit
AgeDetermined 'In Good Health' by InsurerNo Health Questions Asked
50$30$40
55$35$46
60$43$57
65$56$68
70$74$88
75$100$125
80$126$162

* Estimated rates do not reflect the rates of any particular life insurance company.

Monthly Premium Rates for Women*

$5,000 Death Benefit
AgeDetermined 'In Good Health' by InsurerNo Health Questions Asked
50$14$15
55$16$18
60$18$24
65$22$28
70$28$35
75$38$46
80$48$64

* Estimated rates do not reflect the rates of any particular life insurance company.

$10,000 Death Benefit
AgeDetermined ‘In Good Health’ by InsurerNo Health Questions Asked
50$25$28
55$28$36
60$33$45
65$41$55
70$53$69
75$72$90
80$93$126

* Estimated rates do not reflect the rates of any particular life insurance company.

Further Concerns Regarding Life Insurance

If you’re asking yourself, “how much life insurance do I need?”, as you can see, there is no clear-cut answer to this question. The amount of life insurance that you need depends on your circumstances and the reason why you are buying the policy. Make sure you take into account all of the needs of your loved ones and then seek out the life insurance policy that best serves those needs.

How Do You Determine How Much Life Insurance You Need?

There are several methods of calculating how much life insurance you need. You can figure multiples of your salary, use that same method plus add $100,000 for each child that will attend college, or use the DIME method which takes into account your debts, income, mortgage balance, and future educational expenses. As noted earlier, the best way to determine the amount that’s right for you is to use a life insurance calculator.

How Much Life Insurance Does the Average Person Have?

According to the American Council of Life Insurers, the average size of life insurance policies purchased in 2019 was $178,150. However, keep in mind that you should calculate the right amount for you and your family before purchasing your policy

What is the Maximum Amount of Life Insurance I Can Get?

The maximum amount of insurance that you can get varies by insurer, but the standard limits are:

  • 25 to 35 times the annual income for adults 40 and under
  • 20 to 25 times the annual income for adults 40 to 50
  • 10 to 20 times the annual income for adults 50 to 60
  • Five times the annual income for adults 60 to 70
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